On January 26, 2011, Australian supermarket heavyweight Coles began a war for market share against arch-rival Woolworths.

Promoting a strategy for the benefit of shoppers through price cuts, Coles had already slashed the price of more than 5,000 grocery staples under its Down Down campaign, in some cases making up for the cuts through its own funds. The idea of a round-number discount had appealed to the supermarket’s marketeers behind the move and decided to apply it to white milk.

At the time, surging demand was causing milk prices to rise. Coles said it would cover the cost of the discount itself, while also trimming its margin substantially, from 20 cents to as low as 3 cents. The discount, it said, would save consumers A$1m (US$714,000) a week.

But experts cautioned that one dollar milk would have a big impact on Australian dairy farmers. They warned that northern farmers, who mainly sell their milk domestically, would be particularly badly affected, while the price of branded milk would also inevitably fall over time.

Backlash

The backlash from the move was swift and unprecedented. A defiant Coles was hauled up by the Australian Competition and Consumer Commission (ACCC) and a Senate inquiry within months.

“Coles’ customers rightly expect us to keep prices for essential grocery items as low as possible. We will continue to put the interests of our customers first, by delivering on our commitment to offer quality and value ,” Ian McLeod, then managing director, said at the time.

In 2016, increased milk production in the EU led to the price paid back to farmers at the farmgate being significantly slashed. In 2014, Coles’ backed farmer-controlled co-op Murray Goulburn Group with a 10-year private label milk supply contract.

Though this appeared to be an excellent public relations move to show the supermarket’s support for the industry, MG almost collapsed through being forced to cut its milk prices by 15% to below the cost of production.

Helped expansion

At around the A$1.30 mark, the average price of white milk is now cheaper than bottled water and soft drinks, taking into account private label and branded prices.

On the other hand, some processors that have secured supermarket supply contracts have been vocal about how this has helped them expand.

Norco chef executive Brett Kelly credited his cooperative’s deal with Coles for an unprecedented earnings growth, allowing the business to move into the Chinese market. By the same token, the security that comes with contracts to supply milk to supermarkets certainly helps absorb the blow of global price downturns.

Boutique supermarket chain Harris Farm Markets even saw a way to turn expensive milk into a marketing tool. In 2016, it announced it would no longer sell one dollar milk, and announced a deal with Norco to start supplying under the new “Farmer Friendly Milk ” label.

Its chief executive said at the time he believed customers would be happy to accept a 14.5% price hike if the extra money goes to dairy farmers.

Helping farmers

In fairness, supermarkets have made moves to help struggling farmers.

Coles launched milk in Victoria under the Farmers’ Fund brand. For every two liter bottle of Farmers’ Fund milk sold at Coles supermarkets across Victoria, 40 cents is contributed to a dairy industry fund that delivers grants to farmers. The supermarket also operates similar funds with industry groups in other parts of Australia.

Woolworths, meanwhile, sells Farmers Own brand milk which is sourced through negotiated supply contracts with dairy collectives that are paid a premium over the average farm-gate price.

Coles and Woolworths also increased the price of 3-liter containers of milk from A$3 to A$3.30 (US$2.14-US$2.36) and have promised to donate the entire increase to farmers affected by drought.

A December 2017 ACCC ruling found supermarkets selling home-brand one dollar milk are not to blame for Australian dairy farmers being paid low farm-gate prices.

Instead it pointed at a power imbalance between farmers and milk processors, and called for a mandatory code of conduct to strengthen farmers’ bargaining power and improve their share of profits.

Draft clauses for that code were released this month and have been cautiously welcomed by dairy farmers. Under the code, all processors will be forced to release a standard form milk price agreement on a set date each year.

More price wars

But all this may be too little, too late, not least the newly priced supermarket milk. It is estimated that only about 13% of the milk produced by Australian dairy farms ends up as fresh milk. At the same time, most milk production goes to cheese, which is at the heart of a new supermarket war.

At A$6.90 (US$4.93) for a kilo block of Coles home brand cheddar, assuming that 10 liters of milk are used to make it, the cost of the raw materials alone would be under 70 cents per liter of milk before any other price factors are taken into account.

This year will be a crucial one for dairy farmers. Low farm gate prices and crippling drought have led to mounting numbers of them going out of business. Speaking to the ABC, one even predicted that half of his colleagues in New South Wales will go broke this year.

“The cost of milk, just to source the feed alone, is $1.30 per liter ,” he told the broadcaster. The only salvation would come from a bump in farm gate prices or a break to the drought, he said.

Neither of these seems likely in the near future.

Source: dairyreporter.com